Contraband tobacco a growing problem in Canada; new Fraser Institute study provides government with six options for combatting illicit tobacco trade

VANCOUVER, BC—With the contraband tobacco trade now worth at least $2.6 billion, accounting for about 30 per cent of tobacco purchased in Canada, governments need new options for dealing with a problem that has become increasingly worse over the past decade, says a new report released today by the Fraser Institute, Canada’s leading public policy think-tank.

The report, Combatting the Contraband Tobacco Trade in Canada, by Nachum Gabler, Fraser Institute economist, points out that the abundance of contraband tobacco has created a supply of relatively cheap and accessible tobacco, sold in packaging devoid of the warning labels that are clearly visible on lawful cigarette packs, thereby undermining antismoking programs. The black market for tobacco also deprives the private sector of business revenues and the public sector of excise tax receipts—both significant revenue sources. The RCMP has also linked the contraband tobacco trade to violence perpetrated by organized crime groups that dominate the contraband tobacco market.

Combatting the Contraband Tobacco Trade in Canada provides six options for policy makers that could help abate the contraband tobacco trade. Recommendations included in the report are:

Provincial governments could forge agreements allowing Aboriginal bands to collect and keep excise taxes on cigarettes manufactured or sold on reserve lands. These tax agreements would increase the price of contraband cigarettes originating from Aboriginal reserves, thereby reducing the widespread appeal of illegal tobacco in Canada.

Such agreements are currently in place in several jurisdictions, notably Manitoba, New Brunswick, British Columbia, and Washington state. In order to preserve the competitive edge Aboriginal tobacco merchants enjoyed by selling illegal tobacco, some governments have agreed to terms that allow Aboriginals to continue offering a discounted price relative to off-reserve prices by charging an excise tax rate that is slightly below the tax rate applied off-reserve.

The report notes that there is a legitimate argument that rewarding Aboriginal tobacco traffickers is in effect rewarding criminal activity. However, it is also important to note that many in the Aboriginal tobacco trade don’t see their activity as illegal, but as an activity well within their rights as autonomous people on their own lands.

Complete revocation of taxes on tobacco products

The imposition of excessively high taxes on tobacco is likely the main factor encouraging the contraband trade. Eliminating taxes on all tobacco products would be expected to significantly reduce the contraband tobacco trade, but such a move will be viewed by many as unpalatable because of the perception it would increase tobacco use and the negative health effects that that entails.

Reduction in excise taxes and a narrowing of inter-jurisdiction price differences

Reducing tobacco excise taxes in provinces adjacent to American states with low tobacco taxes would bring the retail price of cigarettes in Canada in line with those states with low taxes, thereby undermining that source of contraband tobacco.

Campaign to increase public awareness of the dangers and costs associated with contraband

Contraband tobacco markets are supported by price-sensitive smokers looking to buy discounted cigarettes. These consumers are typically unaware of the extensive social ills that accompany black market tobacco. Since educating Canadians about the risks of tobacco consumption proved effective in reducing tobacco use in general, educating them about the specific harm attributable to the contraband tobacco trade could reduce the demand for contraband products.

Better record keeping by police and Canadian Border Services Agency

A comprehensive and rigorous analysis of the contraband tobacco trade requires detailed and rich data. The Royal Canadian Mounted Police, Canadian Border Services Agency, and provincial policing authorities are not currently tracking several indicators that would help make clear the nature and extent of criminality linked to the contraband market.

Increased enforcement against contraband wholesalers and retailers

Obstructing the contraband tobacco trade at the point of production or sealing smuggling corridors has proven exceedingly difficult, producing mediocre results at best. Instead, law enforcement could refocus efforts on apprehending contraband tobacco wholesalers and retailers.